Bankruptcy judges in Virginia and Texas agree: Subsequent events do not unravel eligibility for Subchapter V.
Specifically, Bankruptcy Judge Rebecca B. Connelly of Harrisonburg, Va., held that a debtor’s eligibility for Subchapter V is determined as of the filing date. Even if an affiliate files bankruptcy the next day with more debt than Subchapter V permits, the first debtor to file remains eligible to reorganize under Subchapter V.
A husband and wife filed a chapter 11 petition and elected to proceed under Subchapter V. The husband was the sole owner and manager of a corporation. The next day, the corporation filed a chapter 7 petition.
The U.S. Trustee agreed that the husband and wife, standing alone, were eligible for Subchapter V because their combined debt did not exceed $7.5 million. However, the couple and the corporation were affiliates under Section 101(2). If the corporate debt were added to the individuals’ debt, the combined debt would exceed $7.5 million, making the couple ineligible for Subchapter V.
If it matters, the couple first consulted an attorney regarding a bankruptcy filing by the corporation. Evidently, counsel advised the couple that they should file first under Subchapter V, because a prior filing by the corporation would relegate them to “ordinary” chapter 11.
The U.S. Trustee filed a motion aimed at forcing the individual debtors to proceed under “ordinary” chapter 11 because their debt, when combined with the corporation’s, exceeded $7.5 million. Judge Connelly denied the motion in her May 17 opinion.
The U.S. Trustee admitted that the couple by themselves were eligible for Subchapter V under Section 1182(1)(A) because they were engaged in commercial activity and had not more than $7.5 million in debt “as of the date of the filing of the petition,” of which not less than 50% arose from commercial activity.
The sticking point, according to the U.S. Trustee, was Section 1182(1)(B)(i). It bars a debtor from Subchapter V if it is a “member of a group of affiliated debtors under this title that has aggregate noncontingent liquidated secured and unsecured debts in an amount greater than $7,500,000.”
The U.S. Trustee argued that the court must consider eligibility based on events that occur postpetition, because the words “as of the date of the filing of the petition” appear in subsection (1)(A) but not in subsection (1)(B).
Judge Connelly disagreed. She said that the “language of section 1182 does not direct a court to determine petition eligibility based on postpetition events.” More specifically, she said:
Section 1182 does not say the conditions are ongoing, include postpetition events, or persist “throughout the case,” nor does section 1182 contain any other language to provide that the debtor’s eligibility is not determined as of the initiation of the case under subchapter V.
The U.S. Trustee contended that a recent amendment adding the words “under this title” to Section 1182(1)(B)(i) means that eligibility is a continuing qualification. Again, Judge Connelly disagreed. She said it was added to make the statute
abundantly clear that the term “debtors” in section 1182(1)(B)(i) is not limited to a group of affiliated debtors which are all proceeding under subchapter V — it was made clear that the debt of any affiliate debtor under any chapter be counted in the calculation.
Judge Connelly rejected the idea that the debtors filed in bad faith because they put themselves into bankruptcy just one day before the affiliated corporation. She said that “the U.S. Trustee has failed to show how professional advice and deliberate planning of the timing of a bankruptcy petition is unlawful or abusive.”
On the merits, Judge Connelly said she agreed with Bankruptcy Judge Christopher Lopez of Houston and his decision in In re Free Speech Sys., LLC, 649 B.R. 729, 733 (Bankr. S.D. Tex. 2023). To read ABI’s report, click here. Like Judge Lopez, she held:
A later event does not make a statement made as of the petition date incorrect. It does not change the eligibility as of the petition date. The debtor is either eligible or not. He does not change his existence during the case.
To bolster her holding, Judge Connelly pointed out the problems that would arise if eligibility were a continuing question. For example, obtaining post-petition financing could push the debtor’s debt above $7.5 million. Or, dismissal of an affiliate’s case might make a sister debtor once again eligible for Subchapter V.
Judge Connelly ended her opinion by pointing out the advantages that Subchapter V bestows on creditors. In Subchapter V as opposed to “ordinary” chapter 11, creditors will have a larger recovery because the debtor pays no fees to the U.S. Trustee. Confirming a plan takes “appreciably” less time, and creditors benefit from the guidance of the Subchapter V trustee.
Judge Connelly denied the motion of the U.S. Trustee, finding that the debtors had established eligibility for Subchapter V.
Bankruptcy judges in Virginia and Texas agree: Subsequent events do not unravel eligibility for Subchapter V.
Specifically, Bankruptcy Judge Rebecca B. Connelly of Harrisonburg, Va., held that a debtor’s eligibility for Subchapter V is determined as of the filing date. Even if an affiliate files bankruptcy the next day with more debt than Subchapter V permits, the first debtor to file remains eligible to reorganize under Subchapter V.
A husband and wife filed a chapter 11 petition and elected to proceed under Subchapter V. The husband was the sole owner and manager of a corporation. The next day, the corporation filed a chapter 7 petition.
The U.S. Trustee agreed that the husband and wife, standing alone, were eligible for Subchapter V because their combined debt did not exceed $7.5 million. However, the couple and the corporation were affiliates under Section 101(2). If the corporate debt were added to the individuals’ debt, the combined debt would exceed $7.5 million, making the couple ineligible for Subchapter V.